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Forex - Dollar pares gains after U.S. service data misses forecasts

The dollar trimmed gains against a basket of the other major currencies on Monday, after reports showing that activity in the U.S. service sector slowed more than expected last month and U.S. factory orders fell for the first time in five months.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.19% to 96.79 by 10.14 ET, off an earlier high of 96.93.

The ISM non-manufacturing purchasing managers’ index fell from 57.5 in April to 56.9 last month, just below forecasts of 57.0.

Meanwhile, the final Markit U.S. services PMI reading for May came in at 53.6, up from 53.1 in April but lower than the initial estimate of 54.0.

Another report showed that U.S. factory orders fell 0.2% in April, snapping four consecutive months of gains.

The data came after the dollar index hit a seven-month nadir on Friday after a disappointing employment report.

The U.S. economy added 138,000 jobs last month the Labor Department reported, falling far short of economists’ expectations for 185,000 new jobs.

Most analysts believe the poor data will not stop the Federal Reserve from raising interest rates at its meeting later this month, but most market participants now expect a more dovish path in the second half of the year.

The dollar pared gains against the safe haven yen, with USD/JPY 110.45 after touching a two-week low of 110.31 overnight.

The yen showed little reaction after a group of Gulf states cut diplomatic relations with Qatar on Monday, leading to heightened tensions in the region.

Sterling pushed higher, with GBP/USD last at 1.2923 after touching an overnight low of 1.2860.

The pound came under pressure after the third terrorist attack in the UK in less than three months killed at least seven people on Saturday.

The attack came ahead of Thursday’s general election, in which polls have indicated is much tighter than previously predicted, with Prime Minister Theresa May’s Conservative Party’s lead narrowing.

While pollsters still expect May will win the most seats in the election, a narrow win could throw Britain into political deadlock just days before formal Brexit talks with the European Union are due to begin on June 19.

Earlier Monday, data showed that growth in the dominant UK service sector slowed last month as political uncertainty ahead of the election and rising inflation weighed.

The euro moved lower, with EUR/USD down 0.28% to 1.1248 from a seven month peak of 1.1283 overnight.

In the euro zone, data earlier confirmed that the currency bloc’s private sector kept growing at its fastest pace since the financial crisis last month.

Patrick Shmidt analyst Vertical Markets